Do you need to make a payment on account?
You might have received a statement from HMRC in the past few weeks reminding you that your payment on account is due by 31st July.
Hopefully, I can shed light on what a payment on account is so you can navigate this aspect of tax compliance.
With the July 31 deadline approaching, it's important to understand what payments on account entail and who they apply to.
Who needs to make a payment on account?
If your tax bill exceeds £1,000 and less than 80% of your tax liability is covered through tax deductions at source (e.g., through PAYE), you're likely to be required to make payments on account.
The first time you're required to make a payment on account can come as a shock as you effectively need to pay 150% of your tax bill in one go (that being the full payment for the first years tax and 50% of the amount as the advance for the second year), so it's essential to understand your individual tax situation.
If you're not feeling confident, I highly recommend consulting with a professional bookkeeper or accountant to ensure compliance.
What are payments on account?
First things first! What are payments on account?
When you're self-employed, HMRC may require you to make payments on account towards your future tax bill. These payments act as an advance payment for your tax liability and help you spread the cost over the year. They are calculated based on your previous year's tax bill.
For example:
You started trading as self employed in April 2021, your first tax return would be the 2021/2022 tax year and your tax bill payable on the 31st January was £2000.
The HMRC make the assumption that you will continue trading to the same level and therefore expect you to have a tax bill for your second year 2022/2023 of at least £2000.
Therefore:
On (By) the 31st January 2023, you would have been required to pay: £3000
Being the £2000 for 2021/2022 and £1000 in advance for the 2022/2023 tax year
On the 31st July 2023, you will be required to pay a further advance of £1000
When you file your 2022/2023 and calculate your final tax bill, any advance payments are deducted and you will need to make a balance payment.
The advantage of filing your tax return early?
Do you normally wait to the last minute to file you tax return?
I always recommend to clients to file their tax returns as early as possible, especially if you have historically been required to make payments on accounts, as there are a couple of advantages to filing your return early.
1. It provides a clear picture of your tax liability, allowing you to manage your cashflow and plan your budget effectively.
2. Early filing will also minimizes the risk of penalties for late submission and gives you peace of mind, knowing that your tax obligations are taken care of.
Why would cashflow forecasting be a benefit?
The one thing that you may have seen me 'go-on & on & on' about on my social media channels is that I urge all business owners to ''Save for Tax As You Earn''
By understanding where your money is coming from or going to and when, makes it easier to ensure you always have funds to pay for the things as they fall due without having to worry about ''robbing peter to pay paul'' (as my gran would say!)
What is a cashflow forecast?
A cash flow forecast is a financial statement that shows the expected inflows and outflows of cash in a business over a period of time, often 12 months. but I recommend at least 3 months (per quarter).
It helps businesses to plan and manage their finances by predicting future cash flow and identifying potential shortfalls or surpluses. It is an essential tool for businesses to ensure they have enough cash to meet their obligations and avoid financial difficulties
How to setup a cashflow forecast
If you're setting a forecast for the first time the easiest option is to use a spreadsheet!
First, decide how far in advance you wish to forecast, then:
1. List all your income (cash/payment of invoices etc) over the next weeks/months that you know you have coming in. Calculate the total.
2. List all your outgoings (bill payments, direct debits, recurring card payments etc), that you know will need to be paid over the next weeks/months.. Calculate the total
3. Work out your running cashflow, deduct your outgoings from your income. If this is positive you have surplus/profit for the period.
4. From this surplus you can allocate a percentage % towards saving for your tax bill and other savings
5. As you go through the weeks / month monitor your actual receipts and spending to make sure your forecast is on track so that you have those funds at the end of the month to put aside for your tax bill
Next step ..
During the reminder of the month I will be diving deeper into the world of tax returns, bookkeeping and cashflow strategies on my social media channels.
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